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BG18 COMMENTARY
BUSINESS GUARDIAN www.guardian.co.tt DECEMBER 2014 • WEEK ONE
The government of Venezuela
is undoubtedly disappointed
with the outcome of the 166th
meeting of the Organisation
of Petroleum Exporting Coun-
tries (OPEC) held in Vienna,
Austria last Thursday.
Despite intense lobbying by Venezuela, the
OPEC decided not to cut oil production even
in the face of declining oil prices globally. The
official communiqué of the meeting declared
that "the conference decided to maintain the
production level of 30.0 mb/d, as was agreed
in December 2011". This was bad news for
Venezuela which needs to sell oil at US$120
per barrel to meet repayments of its loan com-
mitments; finance its domestic social welfare
programme; provide the requisite goods and
services for its people, including security; and
to fund its PetroCaribe arrangements with
neighbouring countries in Central America
and the Caribbean.
Venezuela wanted oil production to be
decreased urgently so that the price of oil
could go up against reduced supply. The coun-
try s foreign minister, Rafael Ramirez, tried to
spearhead an effort to cut oil production by
two million barrels a day by organising a meet-
ing of non-OPEC oil producers Russia and
Mexico with Venezuela and Saudi Arabia in
Vienna on November 25, but the effort came
to naught.
Worse yet for Venezuela, its representatives
failed to convince many Arab states, particularly
Saudi Arabia, that the oil production of all the
OPEC countries should be cut. The Saudis---
Saudi Arabia, Kuwait, Qatar, and the United
Arab Emirates---have large foreign-currency
reserves and, therefore, can withstand a drop
in oil prices for a fairly long time.
Their purpose in keeping the price of oil
low is to wreck shale oil production in countries
such as the United States. Shale oil companies
need a high price of oil to justify investment
in production.
Clearly, the Saudis and other powerful OPEC
members have calculated that the only way
they can remain dominant as oil suppliers in
the global market is to keep shale-oil producers
out of it.
Before the crucial OPEC meeting, the oil
price was hovering close to US$80 a barrel,
lower than it has been for many years and
largely because of shale-oil production. Imme-
diately after the Vienna meeting, the price fell
as low as US$72.74 a barrel. Even if prices sta-
bilise in the coming weeks to around US$75
a barrel, Venezuela will face a short fall of
almost US$40 a barrel; a huge blow to its rev-
enues and its economy.
Against this current background, an under-
taking given on 20 November by Ramirez, on
behalf of the Venezuelan government, to the
14th meeting of the PetroCaribe Council
assumes a huge significance. Ramirez empha-
sised that PetroCaribe "is an energy agreement
that is perfectly sustainable over time" and
he pledged his government s "firm commit-
ment" to it.
He made this commitment, just one week
before the Vienna meeting when it was clear
that the majority of OPEC members would
not cut oil production in order to hike the
price, so he must have done the arithmetic to
know that PetroCaribe could be sustained
even at a reduced world price for oil.
The fact is that, in economic and financial
terms, oil shipments under PetroCaribe, while
generous to its recipient countries, are a small
portion of Venezuela s production, and the
delayed payment terms have a smaller impact
on Venezuela s revenues in comparison with
the bigger blow of a huge drop in the price
of its oil sold globally. It is, therefore, quite
likely that, in financial terms, the Venezuelan
government will be able to sustain PetroCaribe
as foreign minister Ramirez has pledged.
The problem that PetroCaribe poses for the
Venezuelan government is more political than
financial. Within Venezuela, opposition parties
have demonised PetroCaribe as giving away
Venezuela s financial resources when the people
of the country need greater support.
The decline in government revenues, result-
ing from a loss of almost US$40 a barrel for
oil, will put severe strain on the government
of President Nicolas Maduro, and will embold-
en the opposition to further paint the picture
of PetroCaribe as giving away money that
should be spent on the needs of the Venezuelan
people. That is a huge political difficulty for
Maduro.
The PetroCaribe beneficiary countries are
Antigua and Barbuda, Belize, Cuba, Dominica,
Grenada, Guatemala, Guyana, Haiti, Honduras,
Jamaica, Nicaragua, the Dominican Republic,
St Kitts and Nevis, St Vincent and the
Grenadines, St Lucia and Suriname. With oil
at about US$75 a barrel, they can each cope
with the price.
So, how PetroCaribe now benefits them is
in the deferred payment component. Many
of the beneficiary countries pay 40 per cent
of cash up front for oil shipments, while the
balance of the price is converted to a 25-year
loan at 1.0 per cent with a two-year mora-
torium on payments. Many of the beneficiary
countries have been using the loan component
of the price to pay public service salaries and
to fund their recurrent costs. But the debt has
piled-up.
Sensibly, those countries should now set
aside the deferred payment component of the
oil price to build-up their foreign-currency
reserves and to help meet the full price of oil
should this Venezuelan government---or any
other ---be compelled to significantly alter or
dismantle PetroCaribe.
So, at the moment, despite the unwelcome
outcome of the OPEC meeting for Venezuela,
PetroCaribe beneficiary countries, including
those in the Caribbean, will continue to benefit
even as the Venezuelan economy reels from
the impact of US$40 a barrel less in income
for its oil. The beneficiary countries have good
reason for appreciating the goodwill and co-
operation of the Maduro Government.
They would best show it not only by build-
ing-up their foreign reserves to cope with
future increases in oil prices that will inevitably
come, but also by actually repaying the loan
component of the oil shipments they now
receive.
By doing the latter, they would reduce their
own high indebtedness and they would also
allow Maduro to show the Venezuelan people
a return on the investment that he and his
predecessor, Hugo Chavez, made in Caribbean
and Central American countries.
(The writer is a senior fellow at London
University)
RONALD
SANDERS
www.sirronaldsanders.com
Venezuela in financial difficulty...
Will PetroCaribe survive?